2010 ANNUAL R E P O R T

Transcription

1 2010 ANNUAL REPORT

2 MANAGEMENT S DISCUSSION AND ANALYSIS Capital Desjardins inc. (hereinafter also called the Company ) is a wholly-owned subsidiary of the Fédération des caisses Desjardins du Québec (hereinafter also called the Fédération ), and was established to issue securities on capital markets and invest the proceeds thereof in subordinated notes issued by the Fédération s member caisses. The Company manages financial reporting in accordance with Regulation respecting certification of disclosure in issuers annual and interim filings, as prescribed by the Canadian Securities Administrators (hereinafter also called CSA ). The Company s financial governance is discussed on pages 5 and 6 of this Management s Discussion and Analysis (hereinafter also called MD&A ). This MD&A, dated February 24, 2011, presents the results of the main items and changes in the financial position of Capital Desjardins inc. for the period ended December 31, 2010, in comparison with same periods of the previous fiscal year. This MD&A should be read in conjunction with the audited financial statements (including the notes thereto) as at December 31, 2010, which were prepared in accordance with Canadian generally accepted accounting principles (hereinafter also called GAAP ). All amounts in this financial report are expressed in thousands of Canadian dollars, unless otherwise indicated. Additional information about the Company, including the annual information form, is available on the SEDAR Web site at Other information may also be obtained on the Desjardins Web site at even though no information on our site should be considered incorporated herein by reference. CAUTION CONCERNING FORWARD-LOOKING STATEMENTS This MD&A could contain forward-looking statements about the Company s activities and strategies. These forward-looking statements are typically identified by the words believe, expect, anticipate, intend and may, future and conditional verbs and other similar words or expressions. By their nature, forward-looking statements involve assumptions, uncertainties and inherent risks, both general and specific. It is therefore possible that the predictions, projections or other forward-looking statements may not materialize or may prove to be inaccurate because of a number of factors, and that actual results may differ materially. A number of factors beyond our control could influence the accuracy of the forward-looking statements in this MD&A. These factors include changes in legislative and regulatory requirements, changes in the economic and financial conditions including the impact of the current volatility in financial markets which is causing a liquidity shortage in various markets, changing interest rates and exchange rates, and operational risk factors, including management s ability to foresee and manage the abovementioned risk factors. It is important to note that the above-mentioned list of factors that could influence future results is not exhaustive. Other factors could have an adverse effect on results. Although the Company believes that the expectations expressed in these forward-looking statements are reasonable, it can give no assurance or guarantee that these expectations will prove to be correct. The Company cautions readers against placing undue reliance on forward-looking statements when making decisions. The forward-looking statements contained in this report represent management s opinion solely as at this date and are published to help the readers to understand the Company s financial position as at the dates indicated or for the periods ended on such dates, as well as our strategic priorities and objectives, and these statements may not be appropriate for other purposes. The Company does not undertake to update oral or written forward-looking statements that could be made from time to time or on behalf of the Company, except as required under applicable securities legislation. FINANCIAL POSITION (in thousands of dollars) As at December 31, 2010, the Company s total assets stood at $2,922,480 compared to $1,312,719 as at December 31, The Company s assets consisted primarily of subordinated notes issued by the Desjardins caisses totalling $2,900,000 as at December 31, 2010 compared to $1,300,000 as at December 31, As at December 31, 2010, the subordinated notes of the Desjardins caisses were comprised of: Series C subordinated notes issued by the Desjardins caisses for $300,000, maturing on June 1, 2017, bearing interest at an annual rate of 6.502%, payable in equal semi-annual instalments for the first ten years and at an annual rate equal to the 90-day bankers acceptance rate plus 1.05%, payable quarterly for the following five years. The Company may, at its option, demand repayment of the subordinated notes in whole or in part in order to call the Series C senior bonds. However, for calls occurring prior to June 1, 2012, the Company must obtain the prior approval of the Autorité des marchés financiers (hereinafter also called the Autorité ). Accrued interest on these notes amounted to $1,718 as at December 31, Series E subordinated notes issued by the Desjardins caisses for $500,000, maturing on April 1, 2019, bearing interest at an annual rate of 6.006%, payable in equal semi-annual instalments for the first five years and at an annual rate equal to the 90-day bankers acceptance rate plus 5.02%, payable quarterly for the following five years. The Company may, at its option, demand repayment of the subordinated notes in whole or in part in order to call the Series E senior bonds. However, for calls occurring prior to April 1, 2014, the Company must obtain the prior approval of the Autorité. 2 CAPITAL DESJARDINS INC ANNUAL REPORT

3 MANAGEMENT S DISCUSSION AND ANALYSIS (continued) Accrued interest on these notes amounted to $7,508 as at December 31, Series F subordinated notes issued by the Desjardins caisses for $500,000, maturing on June 1, 2021, bearing interest at an annual rate of 5.791%, payable in equal semi-annual instalments for the first seven years and at an annual rate equal to the 90-day bankers acceptance rate plus 3.93%, payable quarterly for the following five years. The Company may, at its option, demand repayment of the subordinated notes in whole or in part in order to call the Series F senior bonds. However, for calls occurring prior to June 1, 2014, the Company must obtain the prior approval of the Autorité. Accrued interest on these notes amounted to $2,413 as at December 31, Series G subordinated notes issued by the Desjardins caisses for $900,000, maturing on May 5, 2020, bearing interest at an annual rate of 5.387%, payable in equal semi-annual instalments. The Series G subordinated notes may not be redeemed by the Company prior to May 5, On or after May 5, 2015, the Company may, at its option, and with prior approval from the Autorité, demand repayment of the Series G subordinated notes in whole or in part in order to fund the redemption of the Series G senior bonds. Accrued interest on these notes amounted to $7,542 as at December 31, Series H subordinated notes issued by the Desjardins caisses for $700,000, maturing on November 23, 2020, bearing interest at an annual rate of 4.047%, payable in equal semiannual instalments for the first five years and at an annual rate equal to the 90-day bankers acceptance rate plus 1.57%, payable quarterly for the following five years. On or after November 23, 2015, the Company may, at its option, and with prior approval from the Autorité, demand repayment of the Series H subordinated notes in whole or in part in order to fund the redemption of the Series H senior bonds. Accrued interest on these notes amounted to $2,990 as at December 31, As at December 31, 2010, the Company s total liabilities amounted to $2,917,455 compared to $1,309,328 as at December 31, The Company s liabilities consisted mainly of senior bonds totalling $2,888,111 as at December 31, 2010 compared to $1,294,349 as at December 31, As at December 31, 2010, senior bonds were comprised of: Series C senior bonds totalling $299,476 (face value of $300,000), bearing interest at an annual rate of 6.322%, payable in equal semi-annual instalments for the first ten years and at an annual rate equal to the 90-day bankers acceptance rate plus 1%, payable quarterly for the following five years and maturing on June 1, The Company may, at its option, call these bonds. These bonds are secured by a first hypothec on the Series C subordinated notes. Accrued interest on these bonds amounted to $1,580 as at December 31, Series E senior bonds totalling $498,202 (face value of $500,000), bearing interest at an annual rate of 5.756%, payable in equal semi-annual instalments for the first five years and at an annual rate equal to the 90-day bankers acceptance rate plus 4.97%, payable quarterly for the following five years and maturing on April 1, The Company may, at its option, call these bonds. These bonds are secured by a first hypothec on the Series E subordinated notes. Accrued interest on these bonds amounted to $7,195 as at December 31, Series F senior bonds totalling $497,834 (face value of $500,000), bearing interest at an annual rate of 5.541%, payable in equal semi-annual instalments for the first seven years and at an annual rate equal to the 90-day bankers acceptance rate plus 3.88%, payable quarterly for the following five years and maturing on June 1, The Company may, at its option, call these bonds. These bonds are secured by a first hypothec on the Series F subordinated notes. Accrued interest on these bonds amounted to $2,309 as at December 31, Series G senior bonds totalling $895,798 (face value of $900,000), bearing interest at an annual rate of 5.187%, payable in equal semi-annual instalments and maturing on May 5, The series G senior bonds may not be redeemed by the Company prior to May 5, On or after May 5, 2015, the Company may, at its option, call these bonds. These bonds are secured by a first hypothec on the Series G subordinated notes. Accrued interest on these bonds amounted to $7,262 as at December 31, Series H senior bonds totalling $696,801 (face value of $700,000), bearing interest at an annual rate of 3.797%, payable in equal semi-annual instalments for the first five years and at an annual rate equal to the 90-day bankers acceptance rate plus 1.32%, payable quarterly for the following five years and maturing on November 23, The series H senior bonds may not be redeemed by the Company prior to November 23, On or after November 23, 2015, the Company may, at its option, call these bonds. These bonds are secured by a first hypothec on the Series H subordinated notes. Accrued interest on these bonds amounted to $2,806 as at December 31, LIQUIDITY AND CAPITAL RESOURCES Many uncertainties, particularly in industrialized countries, prevented the global economy from growing in The sovereign debt crisis in Europe and the disappointing performance of the U.S. economy created considerable volatility in financial markets. Given this environment, most central banks kept their interest rates very low. In Canada, rising commodity prices boosted the equity market and favoured the Canadian dollar, which, in turn, affected exports, particularly in light of the weak economy of our main trading partners. Despite relatively strong domestic demand, the Bank of Canada 2010 ANNUAL REPORT CAPITAL DESJARDINS INC. 3

4 MANAGEMENT S DISCUSSION AND ANALYSIS (continued) suspended in September its policy of increasing its key interest rate that it had begun in June. With growth in most of the industrialized countries in 2011 forecast at 2.5%, it is unlikely that these countries will tighten their monetary policy. Canada may well be the only G7 country to do so, but not before mid-year. In 2010, interest rates in the G7 countries remained at historically low levels due to a rather slow recovery in the global economy. In the months of May and November, 2010, the Company launched two issues of senior bonds for $900 million and $700 million. Furthermore, following the renewal of its short form base shelf prospectus on July 30, 2010, the Company has benefited from a permanent borrowing program on the Canadian market that allows it to issue senior bonds and preferred Class C shares in a maximum amount of $3 billion. This 25-month program expires in August As at December 31, 2010, the available funding balance under this prospectus is $2.3 billion. RATING AGENCIES The Company, a reporting issuer, enjoys premium credit ratings from rating agencies. In fact, its ratings are among the best of the major banking institutions in Canada. The reports of the rating agencies primarily deal with Desjardins Group, on a combined basis, since the credit ratings of the Company are based on the strength of the balance sheets of the caisses. In the last year, the rating agencies maintained Desjardins Group s credit ratings and once again recognized its very strong capitalization, the stability of its surplus earnings, its strong position in the local market and the quality of its assets. In December 2010, the rating agency Fitch gave the Company a rating of A+. The Company was not rated by Fitch as at December 31, The high credit ratings reflect the financial strength of Desjardins Group and its network of caisses and ensure the Group s credibility and recognition among institutional investors. CREDIT RATINGS OF CAPITAL DESJARDINS INC. Credit Agency Rating Standard & Poor s A+ Fitch A+ Moody s Investors Service Aa2 Dominion Bond Rating Service AA (Low) ADDITIONAL INFORMATION FINANCIAL STABILITY BOARD The Company uses the best practices promoted and issued by the Financial Stability Board (hereinafter also called FSB ), an informal economic group made up of national financial authorities, international organizations and groups developing standards in the area of financial stability. These best practices consist of enhanced disclosure, including disclosure of financial instruments which the market considers to be of higher risk. Some of these disclosures are already included in Note 12, Financial instrument risk management, of the notes to the financial statements in the annual report. The Company does not hold any financial instruments that are exposed to significant risk or that pose valuation problems. In fact, its assets are mainly low-risk subordinated notes issued by the Desjardins caisses. Therefore, in our view, no additional disclosure is required. RESULTS ANALYSIS (in thousands of dollars) COMPARISON BETWEEN THE FOURTH QUARTERS OF 2010 AND 2009 For the fourth quarter of 2010, the Company posted net earnings of $580, compared to posted net earnings of $57 for the same period a year earlier. This $523 increase was mainly attributable to a $472 increase in net interest income and a $241 reduction in professional fees, which was offset by a $179 increase in income tax expense. COMPARISON BETWEEN FISCAL YEARS 2010 AND 2009 For fiscal year 2010, the Company recorded net earnings of $1,674, compared to net earnings of $420 for the previous year. This $1,254 increase was mainly attributable to a $1,473 increase in net interest income and a $286 reduction in professional fees, which was offset by a $484 increase in income tax expense. The net interest income increase of $1,473 is due to the issue of Series E and F senior bonds in March and June 2009, respectively, for a total amount of $1,000,000, and of Series G and H in May and November 2010, respectively, for a total amount of $1,600,000. The financial intermediation income results from the interest rate spread between the subordinated notes and the senior bonds. This income finances the operating charges incurred by the Company. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The significant accounting policies are described in Note 2 on page 13 of the notes to the financial statements. CHANGE TO ACCOUNTING POLICIES No new accounting standard was adopted during fiscal year Future changes in accounting policies may be found in Note 3 to the Company s annual financial statements. Some of these policies are of particular importance to the presentation 4 CAPITAL DESJARDINS INC ANNUAL REPORT

5 MANAGEMENT S DISCUSSION AND ANALYSIS (continued) of the Company s financial position and results of operations since they require management to make assumptions and estimates, some of which may involve uncertainties. No significant changes were made to these assumptions and estimates during fiscal year INTERNATIONAL FINANCIAL REPORTING STANDARDS Background In February 2008, the Canadian Accounting Standards Board confirmed that publicly accountable enterprises will be required to apply International Financial Reporting Standards (hereinafter also called IFRS ) starting in In order to comply with this timeline, Desjardins Group, including the Company, set up an IFRS conversion program as early as 2007 and prepared a detailed conversion plan with the three main phases described on page 4 of its 2009 Annual Report: Phase 1 Initiative: Identification and Feasibility Phase 2 Project: Design Realization Deployment Phase 3 Operation: Post-implementation Since January 1, 2011, the Company, which is a publicly accountable enterprise, applies IFRS as its accounting framework for the preparation of its interim and annual financial statements. The Company will issue its first interim financial statements in accordance with IFRS for its first quarter ending March 31, 2011 as well as comparative figures, a statement of financial position (formerly called a balance sheet) as at January 1, 2010 and transitional reconciliations. Work completed to date During the year ended December 31, 2010, the Company continued converting to IFRS by updating its information systems, processes and internal controls as well as deploying its change management plan. The Company has therefore almost completed work on the deployment and postimplementation phases of its conversion program. The main financial impacts arising from the IFRS conversion were also quantified based on the available information and the IFRS in effect as at December 31, The Company has no significant impacts arising from its IFRS conversion. As part of its change management plan, the Company has held training sessions for members of its Board of Directors and Audit Committee as well as with members of its finance department staff. The progress made to date is in line with the established schedule and is reported on a regular basis to management and to the Company s Audit Committee. Raising IFRS awareness throughout Desjardins Group will be a priority until December 31, The Company has developed skeleton of its interim financial statements and notes under IFRS and has continued to gather the financial information needed to produce its financial statements. The Company continuously monitors changes made to standards that could affect its financial statements after January 1, 2011, the IFRS conversion date. FINANCIAL GOVERNANCE The Company must comply with certain requirements of the CSA regulation pertaining to continuous disclosure obligations, oversight of external auditors, certification of financial information and audit committees, which led management to certify the design and the effectiveness of the Company s disclosure controls and procedures and internal control over financial reporting as at December 31, DISCLOSURE CONTROLS AND PROCEDURES Pursuant to the CSA directives set out in Multilateral Instrument , the Company s Chair of the Board of Directors and Chief Executive Officer and its Chief Financial Officer have designed or caused to be designed disclosure controls and procedures that are supported by periodic certification of financial information reported in annual and interim filings. The information compiled during the financial governance process is reviewed quarterly and annually by members of Desjardins Group s Disclosure Committee and Audit Committee, the latter playing a key role in terms of overseeing and evaluating the effectiveness of the Company s financial disclosure controls and procedures. As at December 31, 2010, based on the control framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (hereinafter also called COSO ), management evaluated the design and effectiveness of the Company s financial disclosure controls and procedures. Based on this evaluation, the Chair of the Board of Directors and Chief Executive Officer and the Chief Financial Officer have certified that these disclosure controls and procedures provide assurance that information required to be filed or reported under Canadian securities legislation is recorded, processed, summarized and presented within the time periods specified by the relevant rules and forms, thus providing investors with complete and reliable information. INTERNAL CONTROL OVER FINANCIAL REPORTING The Company s management is responsible for establishing and maintaining adequate internal control over financial reporting so as to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. As in the case of the assessment of disclosure controls and procedures, the design and effectiveness of internal control over financial reporting was evaluated based on the COSO control framework ANNUAL REPORT CAPITAL DESJARDINS INC. 5

6 MANAGEMENT S DISCUSSION AND ANALYSIS (continued) Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements due to error or fraud. As such, management s evaluation of such controls can provide only reasonable, not absolute, assurance that all control issues that could result in material misstatement have been detected. Based on this assessment, the Chair of the Board of Directors and Chief Executive Officer and the Chief Financial Officer have concluded that the Company s internal control over financial reporting was effective as of December 31, 2010, and free of material weaknesses. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There were no changes in the Company s internal control over financial reporting since September 30, 2010 that have materially affected, or that are reasonably likely to materially affect, its internal control over financial reporting. SENIOR MANAGEMENT APPOINTMENTS Mr. Louis-Daniel Gauvin was appointed Senior Vice-President and General Manager of Caisse centrale Desjardins and Capital Desjardins inc. Mr. Gauvin will also be responsible for investor relations at a time when the Desjardins Group plans to grow its presence in national and international financial markets. In addition, he will be responsible for the Desjardins Group s compliance activities and regulatory relations. Finally, the Company announced the retirement of Mr. Bruno Morin, General Manager of Caisse centrale Desjardins and Capital Desjardins inc. These changes take effect on February 25, Monique F. Leroux, FCA, FCMA Chair of the Board of Directors and Chief Executive Officer Raymond Laurin, FCA Chief Financial Officer February 24, CAPITAL DESJARDINS INC ANNUAL REPORT

7 EARNINGS COVERAGE RATIOS The following table shows the calculation of the Company's earnings coverage ratio and, for illustrative purposes, that of Desjardins Group. FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2010 AND 2009 Capital Desjardins inc. (in thousands of dollars) Desjardins Group (in millions of dollars) (A) Interest on total debt $ 110,447 $ 61,711 $ 108 $ 67 (B) Earnings (1) or surplus earnings (2) 112,768 62,294 2,025 1,570 (C) Earnings coverage ratio (B) / (A) times times times times (3) (1) Earnings of Capital Desjardins inc. before interest on total debt and income taxes. (2) Surplus earnings of Desjardins Group before member dividends, interest on total debt, non-controlling interests and income taxes. (3) Certain comparative figures have been restated in order to reflect a change to an accounting policy applied retroactively. Desjardins Group is not a guarantor of the senior bonds ANNUAL REPORT CAPITAL DESJARDINS INC. 7

8 SUMMARY OF QUARTERLY RESULTS RESULTS (unaudited, by quarter, in thousands of dollars) Q4 Q3 Q2 Q1 Q4 Q3) Q2 Q1 Interest income $ 34,733 $ 31,744 $ 27,165 $ 19,622 $ 19,622 $ 19,624) $ 14,845 $ 9,004 Interest expense 33,784 30,913 26,464 19,147 19,145 19,139) 14,460 8,868 Net interest income ) Other income 1 1 (1) 2 8 Expenses other than interest on bonds ) Earnings before income taxes ) Income tax expense ) Net earnings $ 580 $ 495 $ 354 $ 245 $ 57 $ 181) $ 148 $ 34 BALANCE SHEET (unaudited, by quarter, in thousands of dollars) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Assets Current assets $ 22,191 $ 51,020 $ 19,280 $ 31,567 $ 12,719 $ 31,624 $ 11,961 $ 7,671 Subordinated notes issued by Desjardins caisses 2,900,000 2,200,000 2,200,000 1,300,000 1,300,000 1,300,000 1,300, ,000 Deferred expenses Total assets $ 2,922,480 $ 2,251,406 $ 2,219,334 $ 1,331,699 $ 1,312,719 $ 1,331,624 $1,311,961 $ 807,911 Liabilities and shareholder's equity Current liabilities $ 27,621 $ 54,307 $ 22,703 $ 31,310 $ 12,493 $ 31,424 $ 13,710 $ 7,426 Senior bonds 2,888,111 2,190,928 2,190,650 1,294,634 1,294,349 1,294,119 1,293, ,349 Borrowings 1,063 1,238 1,607 1,778 2,142 2, Future income tax liabilities Shareholder's equity 5,025 4,485 3,990 3,636 3,391 3,374 3,193 3,045 Total liabilities and shareholder's equity $ 2,922,480 $ 2,251,406 $ 2,219,334 $ 1,331,699 $ 1,312,719 $ 1,331,624 $1,311,961 $ 807,911 8 CAPITAL DESJARDINS INC ANNUAL REPORT

9 INDEPENDENT AUDITOR S REPORT To the Shareholder of Capital Desjardins inc. We have audited the accompanying financial statements of Capital Desjardins inc., which comprise the balance sheets as at December 31, 2010 and December 31, 2009 and the statements of earnings, retained earnings and cash flows for the years then ended, and the notes to the financial statements and a summary of significant accounting policies. MANAGEMENT S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. AUDITOR S RESPONSIBILITY Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. OPINION In our opinion, the financial statements present fairly, in all material respects, the financial position of Capital Desjardins inc. as at December 31, 2010 and December 31, 2009 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. PricewaterhouseCoopers LLP1 1 Montreal, Quebec February 24, Chartered accountant auditor permit No ANNUAL REPORT CAPITAL DESJARDINS INC. 9

10 BALANCE SHEET AS AT DECEMBER 31 (in thousands of dollars) ASSETS Current assets Cash $ $ 1,068 Accrued interest and other receivables 22,191 11,651 22,191 12,719 Subordinated notes issued by Desjardins caisses, at cost (Notes 4 and 5) Series C 300, ,000 Series E 500, ,000 Series F 500, ,000 Series G 900,000 Series H 700,000 2,900,000 1,300,000 Deferred expenses, at unamortized cost 289 Total assets $ 2,922,480 $ 1,312,719 LIABILITIES AND SHAREHOLDER'S EQUITY LIABILITIES Current liabilities Bank loan (Note 6) $ 2,323 $ Accrued interest and other accrued liabilities 22,122 11,249 Current portion of borrowings 3,079 1,039 Income taxes payable ,621 12,493 Senior bonds (Note 5) Series C 299, ,134 Series E 498, ,714 Series F 497, ,501 Series G 895,798 Series H 696,801 2,888,111 1,294,349 Borrowings (Note 7) 1,063 2,142 Future income tax liabilities SHAREHOLDER'S EQUITY Capital stock (Note 8) 1,010 1,010 Retained earnings 4,015 2,381 5,025 3,391 Total liabilities and shareholder's equity $ 2,922,480 $ 1,312,719 The notes are an integral part of the financial statements. On behalf of the Board fo Directors of Capital Desjardins inc. Monique F. Leroux, FCA, FCMA Chair of the Board of Directors and Chief Executive Officer Denis Paré, LL.L, D.D.N. Vice-Chair of the Board of Directors 10 CAPITAL DESJARDINS INC ANNUAL REPORT

11 STATEMENTS OF EARNINGS AND OF RETAINED EARNINGS YEAR ENDED DECEMBER 31 (in thousands of dollars) STATEMENT OF EARNINGS ) Interest income Subordinated notes issued by Desjardins caisses Series C $ 19,506 $ 19,506) Series D 3,963) Series E 30,030 22,736) Series F 28,955 16,890) Series G 31,783 ) Series H 2,990 ) 113,264 63,095) Interest expense Senior bonds Series C 19,308 19,287) Series D 3,888) Series E 29,268 22,090) Series F 28,038 16,347) Series G 30,826 ) Series H 2,868 ) 110,308 61,612) Net interest income 2,956 1,483) Other income 1 10) Total income 2,957 1,493) Expenses other than interest on bonds Professional fees ) Tax on capital 13 41) Financial expenses ) ) Earnings before income taxes 2, ) Income tax expense (recovery) Current income taxes ) Future income taxes 316 (67) ) Net earnings for the year $ 1,674 $ 420) The notes are an integral part of the financial statements. STATEMENT OF RETAINED EARNINGS )) Balance at beginning of year $ 2,381 $ 2,001) Net earnings for the year 1, ) 4,055 2,421) Dividends on common shares 40 40) Balance at end of year $ 4,015 $ 2,381) The notes are an integral part of the financial statements ANNUAL REPORT CAPITAL DESJARDINS INC. 11

12 STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31 (in thousands of dollars) 2010) 2009) Cash flows from (used in) operating activities Net earnings for the year $ 1,674) $ 420) Adjustments for : Net change in accrued interest and others (521) (301) Change in income taxes payable (108) 540) Capitalized expenses on bonds 1,448) 1,000) Change in future income taxes 316) (67) 2,809) 1,592) Cash flows from (used in) financing activities Redemption of Series D senior bonds ) (450,000) Issuance of senior bonds, Series E, net of commission expenses ) 498,250) Issuance of senior bonds, Series F, net of commission expenses ) 498,150) Issuance of senior bonds, Series G, net of commission expenses 896,400) ) Issuance of senior bonds, Series H, net of commission expenses 697,550) ) Long-term borrowings repaid (1,039) (611) Long-term borrowings incurred 2,000) 2,500) Bank loan incurred 2,323) ) Capitalized deferred expenses, Base shelf prospectus (120) ) Other capitalized expenses on bonds, Series E, F, G and H (951) (1,238) Dividends paid (40) (40) 1,596,123) 547,011) Cash flows from (used in) investing activities Retraction of Series D subordinated notes issued by Desjardins caisses ) 450,000) Purchase of Series E subordinated notes issued by Desjardins caisses ) (500,000) Purchase of Series F subordinated notes issued by Desjardins caisses ) (500,000) Purchase of Series G subordinated notes issued by Desjardins caisses (900,000) ) Purchase of Series H subordinated notes issued by Desjardins caisses (700,000) ) (1,600,000) (550,000) Decrease in cash (1,068) (1,397) Cash at beginning of year 1,068) 2,465) Cash at end of year $ ) $ 1,068) Supplemental information on cash flows Interest paid $ 98,935) $ 56,185) Income taxes paid (recovery) 439) (309) The notes are an integral part of the financial statements. 12 CAPITAL DESJARDINS INC ANNUAL REPORT

13 NOTES TO THE FINANCIAL STATEMENTS (in thousands of dollars, unless otherwise stated) 1. GOVERNING STATUES AND NATURE OF OPERATIONS Capital Desjardins inc. (hereinafter also called the Company ), incorporated under Part 1A of the Companies Act (Quebec), issues its own senior bonds on capital markets and invests the proceeds thereof in subordinated notes issued by the Desjardins caisses. The Desjardins caisses are governed by the Act respecting financial services cooperatives and are affiliated with the Fédération des caisses Desjardins du Québec (hereinafter also called the Fédération ), the parent of Capital Desjardins inc. 2. SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in accordance with Canadian generally accepted accounting principles (hereinafter also called GAAP ) requires management to make certain estimates and assumptions that have an impact on assets and liabilities as well as income and expenses for the reporting periods. Actual results may differ from those estimates. FINANCIAL INSTRUMENTS RECOGNITION AND MEASUREMENT The Company recognizes its financial instruments in accordance with the Canadian Institute of Chartered Accountants (hereinafter also called CICA ) standards entitled Financial Instruments Recognition and Measurement (Section 3855), Hedges (Section 3865) and Comprehensive Income (Section 1530). Financial assets must be classified as one of the following categories: Held for trading, Available for sale, Held to maturity, or Loans and receivables, based on their characteristics and the purpose of their acquisition. Financial liabilities must be classified as Held for trading or Other liabilities. Financial assets and financial liabilities are initially recognized at fair value. Subsequently, financial assets and financial liabilities held for trading as well as available-for-sale financial assets continue to be recorded on the balance sheet at fair value. Changes in the fair value of financial assets and financial liabilities held for trading are recognized in income, while changes in the fair value of available-for-sale financial assets are recorded in other comprehensive income until they are derecognized. Financial assets held to maturity, loans or receivables and financial liabilities not held for trading are recognized at cost after amortization using the effective interest method. Transaction costs for financial instruments are capitalized and then amortized over the term of the investment using the effective interest method, except if such instruments are classified as Held for trading, in which case these costs are expensed as incurred. The subordinated notes of the Desjardins caisses and accrued interest meet the definition of Loans and receivables, so they are classified as such and then recognized at cost. Senior bonds are classified as Other liabilities, so they are recognized at cost after amortizing transaction costs. Transaction costs consist of expenses incurred to issue securities on financial markets. These expenses are amortized at the effective interest rate until May 2012 for Series C, March 2014 for Series E, May 2016 for Series F, May 2020 for Series G and November 2015 for Series H. Borrowings are classified as Other liabilities and are, therefore, recognized at cost. INCOME TAXES The Company follows the liability method of accounting for income taxes. Under this method, future income tax assets and liabilities are determined based on temporary deductible or taxable differences between the carrying amounts and the tax bases of the assets and liabilities, using enacted or substantively enacted tax rates that apply in the period during which the differences are expected to reverse. 3. FUTURE ACCOUNTING CHANGES INTERNATIONAL FINANCIAL REPORTING STANDARDS The Canadian Accounting Standards Board has announced that Canadian GAAP applicable to publicly accountable enterprises will be replaced by International Financial Reporting Standards (hereinafter also called IFRS ) in The Company therefore initiated an IFRS conversion project in the summer of Since the Company will adopt IFRS on January 1, 2011, the new Canadian GAAP coming into effect on or after January 1, 2011 will not be presented as future accounting changes because the Company will no longer issue its financial statements under Canadian GAAP ANNUAL REPORT CAPITAL DESJARDINS INC. 13

14 NOTES TO THE FINANCIAL STATEMENTS (in thousands of dollars, unless otherwise stated) 4. SUBORDINATED NOTES ISSUED BY THE DESJARDINS CAISSES SERIES C SUBORDINATED NOTES The proceeds from the issuance of the Series C senior bonds were used by the Company to purchase Series C subordinated notes issued by the caisses, in proportion to the average assets of each caisse, for a total of $300,000 maturing on June 1, These notes bear interest at an annual rate of 6.502%, the interest being payable in equal semi-annual instalments for the first ten years, and at an annual rate equal to the 90-day bankers acceptance rate plus 1.05% for the following five years, with the interest being payable quarterly. The Company may, at its option, demand repayment of the subordinated notes in whole or in part in order to call the Series C senior bonds. However, for calls prior to June 1, 2012, the Company must obtain prior approval from the Autorité des marchés financiers (hereinafter also called the Autorité ). SERIES E SUBORDINATED NOTES The proceeds from the issuance of the Series E senior bonds were used by the Company to purchase Series E subordinated notes issued by the caisses, in proportion to the average assets of each caisse, for a total of $500,000 maturing on April 1, These notes bear interest at an annual rate of 6.006%, the interest being payable in equal semi-annual instalments for the first five years, and at an annual rate equal to the 90-day bankers acceptance rate plus 5.02%, for the following five years, with the interest being payable quarterly. The Company may, at its option, demand repayment of the subordinated notes in whole or in part in order to call the Series E senior bonds. However, for calls prior to April 1, 2014, the Company must obtain prior approval from the Autorité. SERIES F SUBORDINATED NOTES The proceeds from the issuance of the Series F senior bonds were used by the Company to purchase Series F subordinated notes issued by the caisses, in proportion to the average assets of each caisse, for a total of $500,000 maturing on June 1, These notes bear interest at an annual rate of 5.791%, the interest being payable in equal semi-annual instalments for the first seven years, and at an annual rate equal to the 90-day bankers acceptance rate plus 3.93%, for the following five years, with the interest being payable quarterly. The Company may, at its option, demand repayment of the subordinated notes in whole or in part in order to call the Series F senior bonds. However, for calls prior to June 1, 2014, the Company must obtain prior approval from the Autorité. SERIES G SUBORDINATED NOTES The proceeds from the issuance of the Series G senior bonds were used by the Company to purchase Series G subordinated notes issued by the caisses, in proportion to the average assets of each caisse, for a total of $900,000 maturing on May 5, These notes bear interest at an annual rate of 5.387%, the interest being payable in equal semi-annual instalments. The Company may not demand repayment of the Series G subordinated notes prior to May 5, On or after May 5, 2015, the Company may, at its option and with prior approval from the Autorité, demand repayment of the Series G subordinated notes in whole or in part in order to fund the redemption of the Series G senior bonds. SERIES H SUBORDINATED NOTES The proceeds from the issuance of the Series H senior bonds were used by the Company to purchase Series H subordinated notes issued by the caisses, in proportion to the average assets of each caisse, for a total of $700,000 maturing on November 23, These notes bear interest at an annual rate of 4.047%, the interest being payable in equal semi-annual instalments for the first five years, and at an annual rate equal to the 90-day bankers acceptance rate plus 1.57%, for the following five years, with the interest being payable quarterly. The Company may not demand repayment of the Series H subordinated notes prior to November 23, On or after November 23, 2015, the Company may, at its option and with prior approval from the Autorité, demand repayment of the Series H subordinated notes in whole or in part in order to fund the redemption of the Series H senior bonds. 5. SENIOR BONDS SERIES C SENIOR BONDS Under the terms of a purchase and resale agreement signed on May 9, 2002, the Company agreed to issue, for a consideration of $300,000 (book value of $299,476 as at December 31, 2010), Series C senior bonds, maturing in June These bonds bear interest at an annual rate of 6.322% for the first ten years and at an annual rate equal to the 90-day bankers acceptance rate plus 1% for the following five years. The Company may, at its option, redeem these bonds. These bonds are secured by a first hypothec on the Series C subordinated notes described in Note 4. These bonds also contain certain negative pledge clauses, including limits on the additional debt that the Company can issue and prohibiting the Company from giving new security on the collateral. 14 CAPITAL DESJARDINS INC ANNUAL REPORT

15 NOTES TO THE FINANCIAL STATEMENTS (in thousands of dollars, unless otherwise stated) 5. SENIOR BONDS (continued) SERIES E SENIOR BONDS Under the terms of a purchase and resale agreement signed on March 30, 2009, the Company agreed to issue, for a consideration of $500,000 (book value of $498,202 as at December 31, 2010), Series E senior bonds, maturing in April These bonds bear interest at an annual rate of 5.756% for the first five years and at an annual rate equal to the 90-day bankers acceptance rate plus 4.97% for the following five years. The Company may, at its option, redeem these bonds. These bonds are secured by a first hypothec on the Series E subordinated notes described in Note 4. These bonds also contain certain negative pledge clauses, including limits on the additional debt that the Company can issue and prohibiting the Company from giving new security on the collateral. SERIES F SENIOR BONDS Under the terms of a purchase and resale agreement signed on June 1, 2009, the Company agreed to issue, for a consideration of $500,000 (book value of $497,834 as at December 31, 2010), Series F senior bonds, maturing in June These bonds bear interest at an annual rate of 5.541% for the first seven years and at an annual rate equal to the 90-day bankers acceptance rate plus 3.88% for the following five years. The Company may, at its option, redeem these bonds. These bonds are secured by a first hypothec on the Series F subordinated notes described in Note 4. These bonds also contain certain negative pledge clauses, including limits on the additional debt that the Company can issue and prohibiting the Company from giving new security on the collateral. 6. BANK LOAN The Company has a subordinated operating credit facility in a maximum authorized amount of $5,000 ($2,000 as at December 31, 2009). The subordinated operating credit facility is repayable on demand and bears interest at the cost of funds of Caisse centrale Desjardins, plus a margin based on a loan 7. BORROWINGS SERIES G SENIOR BONDS Under the terms of a purchase and resale agreement signed on May 5, 2010, the Company agreed to issue, for a consideration of $900,000 (book value of $895,798 as at December 31, 2010), Series G senior bonds, maturing in May These bonds bear interest at an annual rate of 5.187%. The series G senior bonds may not be redeemed by the Company prior to May 5, These bonds are secured by a first hypothec on the Series G subordinated notes described in Note 4. These bonds also contain certain negative pledge clauses, including limits on the additional debt that the Company can issue and prohibiting the Company from giving new security on the collateral. SERIES H SENIOR BONDS Under the terms of a purchase and resale agreement signed on November 23, 2010, the Company agreed to issue, for a consideration of $700,000 (book value of $696,801 as at December 31, 2010), Series H senior bonds, maturing in November These bonds bear interest at an annual rate of 3.797% for the first five years and at an annual rate equal to the 90-day bankers acceptance rate plus 1.32% for the following five years. The series H senior bonds may not be redeemed by the Company prior to November 23, On or after November 23, 2015, the Company may, at its option redeem these bonds. These bonds are secured by a first hypothec on the Series H subordinated notes described in Note 4. These bonds also contain certain negative pledge clauses, including limits on the additional debt that the Company can issue and prohibiting the Company from giving new security on the collateral. with a 2-year term plus 0.75% (plus 0.5% as at December 31, 2009). As at December 31, 2010, an amount of $2,323 of the subordinated operating credit facility had been drawn (in 2009, undrawn) Subordinated term borrowings payable from Caisse centrale Desjardins 3.65%, payable in semi-annual instalments, including principal and interest, in the amount of $33 until maturity in April 2014 $ 216 $ %, payable in semi-annual instalments, including principal and interest, in the amount of $386 until maturity in July ,488 2, %, payable in semi-annual instalments, including principal and interest, in the amount of $155 until maturity in June %, payable in semi-annual instalments, including principal and interest, in the amount of $1,018 until maturity in November ,000 4,142 3,181 Less: Current portion 3,079 1,039 $ 1,063 $ 2, ANNUAL REPORT CAPITAL DESJARDINS INC. 15

16 NOTES TO THE FINANCIAL STATEMENTS (in thousands of dollars, unless otherwise stated) 7. BORROWINGS (continued) Annual principal instalments payable over the next four years amount to $3,079 in 2011, $967 in 2012, $63 in 2013 and $33 in Payment of interest or principal on these borrowings is subordinated to the payment of any interest or principal owed on Series C, E, F and G senior bonds issued by the Company. On July 12, 2010, the Company was granted an additional subordinated term borrowing from Caisse centrale Desjardins in a maximum amount of $5,000, maturing on June 30, As at December 31, 2010, an amount of $3,000 of this borrowing remained undrawn. 8. CAPITAL STOCK Authorized Unlimited number of shares, without par value Common shares, voting and participating Class A, non-voting and non-participating, preferred shares with no dividend rights, redeemable at the paid-up capital amount Class B, non-voting and non-participating, preferred shares with no dividend rights, redeemable at the paid-up capital amount Issued and fully paid 10,000 common shares $ 10 $ 10 1,000,000 Class A preferred shares 1,000 1,000 $ 1,010 $ 1, FAIR VALUE OF FINANCIAL INSTRUMENTS The fair values of cash, accrued interest, bank loan, other receivables and other accrued liabilities are equivalent to their book values given their short-term maturities. As at December 31, the fair value of the other financial instruments is detailed below: Favourable Favourable (unfavourable) (unfavourable) Fair value Book value variance Fair value Book value variance Subordinated notes $ 3,043,788 $ 2,900,000 $ 143,788) $ 1,404,385 $ 1,300,000 $ 104,385) Senior bonds 3,044,728 2,888,111 (156,617) 1,405,758 1,294,349 (111,409) Borrowings 4,157 4,142 (15) 3,231 3,181 (50) The fair value of subordinated notes and borrowings is determined by discounting future cash flows using rates the Company could obtain at year-end for securities with similar terms and maturities. The fair value of senior bonds is based on market prices. Cash is the only financial instrument recognized at fair value. This instrument is evaluated at level 1 of the hierarchy. This level consists of a valuation based on listed (unadjusted) prices on active markets for identical assets. 16 CAPITAL DESJARDINS INC ANNUAL REPORT

17 NOTES TO THE FINANCIAL STATEMENTS (in thousands of dollars, unless otherwise stated) 10. RELATED PARTY TRANSACTIONS The transactions carried out with the Desjardins caisses and other Desjardins Group entities related to the Company generated income of $113,265 and expenses of $5,853 for 2010 (income of $63,104 and expenses of $360 for 2009). The balance sheet items between these related parties include assets of $2,922,183 and liabilities of $89,864 as at December 31, 2010 (assets of $1,312,695 and liabilities of $11,507 as at December 31, 2009). In addition to the above-mentioned transactions, an amount of $31 paid to the Fédération and an amount of $1,857 paid to Desjardins Securities are included in the expenses capitalized on senior bonds on the balance sheet as at December 31, These transactions occurred in the normal course of business and were measured at the exchange amount, which represents the amount of consideration established and agreed upon by the related parties. 11. CAPITAL MANAGEMENT The Company seeks to maintain sufficient shareholders equity to ensure the continuity of its operations, which includes regularly paying dividends to its shareholders. As a wholly-owned subsidiary of the Fédération, the Company is not itself bound by regulatory requirements regarding its capital, such conditions applying instead to Desjardins Group as a whole. The Company s assets are consolidated for the purposes of evaluating the composition and adequacy of Desjardins Group s capital, conducted according to the Autorité s guidelines on capital adequacy standards. 12. FINANCIAL INSTRUMENT RISK MANAGEMENT The Company was created exclusively for the purpose of offering its securities on the financial markets and investing the proceeds thereof in securities issued by the Desjardins caisses to meet their liquidity needs. The Company therefore acts as a link with external investors in order to provide the caisses with easier access to institutional capital. The Fédération s Board of Directors is responsible for guiding, planning, coordinating and overseeing the activities of Desjardins Group, of which the Company is a part. The Board also has risk management responsibilities with respect to Desjardins Group and is supported in this area by the Risk Management Commission, the Audit and Inspection Commission and the Board of Ethics and Professional Conduct. During the normal course of business, the Company is exposed to different types of risk, including credit risk, liquidity risk and market risk. CREDIT RISK MANAGEMENT Credit risk is the risk of losses resulting from a caisse s failure to fulfill its contractual obligations as regards the subordinated notes issued to the Company. The securities issued by the caisses to the Company are, in fact, subordinated, as to right of payment, to all the other obligations of the caisses. However, this risk is considered minimal given that Desjardins Group has implemented certain financial intervention mechanisms designed to help caisses experiencing financial difficulties. Moreover, the Act respecting financial services cooperatives expressly authorizes the Fédération to cover the operating deficit of any caisse whose general reserve is insufficient. MAXIMUM EXPOSURE TO CREDIT RISK Recognized on the balance sheet Cash $ $ 1,068 Accrued interest 22,171 11,627 Subordinated notes issued by Desjardins caisses, at cost 2,900,000 1,300,000 Total recognized on the balance sheet $ 2,922,171 $ 1,312, ANNUAL REPORT CAPITAL DESJARDINS INC. 17